Despite a movement of manufacturing towards neighboring countries as China’s costs of production and living begin to rise, there are still compelling reasons many successful companies are staying put.
Table of Contents:
Introduction
It is no secret that the manufacture of goods has been moving out of China in recent years now, but there are still many US companies that continue to manufacture their goods in China because of it’s comparative advantages.
For instance, Nike makes about 80% of its shoes in China, but it has been gradually moving those jobs away from China, as wages and the costs of living have gone up, to countries places such as Vietnam (in 2018, manufacturing labor was $2.73 U.S. dollars per hour) and Indonesia, and because of difficulties with intellectual property rights.
There are many reasons why these household-name companies continue to manufacture their products in China despite all of the negative press about factors likes working conditions, perceived quality of produced goods and so on.
Related Article: Breakdown of the Pros & Cons of Manufacturing in China vs the US
Why US Companies Still Manufacture In China
There are many reasons why these companies continue to manufacture their products in China, rather than back in the US, despite all of the negative press about working conditions and intellectual property theft. These include the following:
Human Resources
Labor costs are still far lower in China compared to the US. In 2018, manufacturing labor costs in China were around $5 U.S. dollars per hour as compared to $27 per hour in the US.
As there is no reliable social security agency or unemployment benefits in China, workers are forced to accept lower pay than they would otherwise demand.
There are fewer restrictions on hiring and firing employees with comparatively weaker labour laws and employee rights. Most companies in China can fire employees without providing a reasonable cause.
Material, Tariffs, and Export Costs
Cheap local supply of parts and materials with no international tariffs or quotas to deal with. This saves an estimated 25% off the finished goods cost from US production. In most industries, parts made in China are even cheaper than those from other Asian countries. Tariffs and quotas on US goods would quickly raise the price of finished goods to a level that may not cover the additional expenses required for US production
This is true even before considering any additional costs incurred by downtime due to shipping issues. Relatively low rate of inflation due to government influence on the Yuan value, allowing greater profits from devalued exports into the US market.
Supply Chain Infrastructure and Quick Turnaround
The global supply chain business model is moving closer to China with better infrastructure (China has good railroads, ports, highways etc. ). Power supplies are plentiful. Factories benefit from easy transport between provinces-no border tolls)
Local suppliers require significantly shorter lead times. Chinese suppliers are more willing to use prototype parts and make samples in order to help companies ensure that their products will be ready for market without any design flaws.
This can save months of design time, which would otherwise have been spent on engineering changes once the product was at full-rate production.
Welcomes Foreign Investment
Openness for foreign investment-thriving for international investors with strong expertise, capital and technology. Domestic government support for growth of potential multinational corporations, with preferential entitlement-granting programs, such as special economic zones. to generate future business opportunities.
The list of reasons goes on and on, but the point is that US manufacturing has not moved to China because of poor economic conditions in America. Instead, almost all US companies choose to manufacture their goods in China because it’s simply cost-effective and easier for the bottom line.
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Remaining Issues of Manufacturing in China
Issues still remain for American businesses to consider manufacturing goods in China an attractive choice. Most recent, is rises in the cost of living and labour movement have led to salary increases. More examples include:
Intellectual property theft and counterfeiting. A large amount of intellectual property has already been illegally copied or reverse engineered
Poor environmental and worker conditions (compared to Western standards), sub-standard skills or appreciation of quality standards. Insufficient or very little OSHA type protection in factories
Corruption. Anti-competitive behavior by Chinese companies or government organizations who are forced to favor local manufacturers
Lack of business regulations or the uneven application of them. China is a land where old school business practices apply with little oversight from government agencies. In order to be successful in China, it requires an understanding of these practices as well as the ability to work within them rather than against them.
As a result, pressure is being put on US companies to move their business elsewhere. This has led several hi-tech or high value-added industries including semiconductors, petrochemicals, aerospace, communication technology to move manufacturing out of China.
Related Article: Is it really cheaper to manufacture in China?
Sustaining US Manufacturing in China
The most important aspect is to create a strong supply chain network. This will help ensure that the product is delivered on time and shipped to the end customer without errors. This network consists of manufacturers, shipping companies, insurance agents and others who are involved in bringing the goods to their final destination. The strength of this network determines how many problems may arise during the shipping process.
Even though China is becoming more expensive for manufacturers, it is still cheaper than bringing manufacturing back to America. While many companies have left China since its peak in 2010 – 2015, there are still many that remain. This is mainly because Chinese factories provide speed, and at a recognized quality level, at lower costs than American factories can provide.
Related Article: Top 21 manufacturing and product sourcing centers in China
Conclusion
China has been the world’s factory for several decades now. It caters to an immense chunk of not only Asian, but also global manufacturing. In fact, it exports more goods than any other country does on a yearly basis. Many countries have outsourced their entire production line to Chinese manufacturers because of one simple reason – cost effectiveness.
To this day many US companies still consider the benefits outweighing the risks associated with producing goods in China which are too great to ignore. Even though it will continue to be difficult for foreign companies operating there, people should not forget that China is also equally difficult for local businesses trying to compete.
To make an successful entry into China based manufacturing, from design, assembling, packaging to chain supply management, work with China based partners. With production expertise, extensive overseas backgrounds and a long portfolio of foreign business co-operation this will go a long way in mitigating any issues of China based manufacturing.
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